Combining vacation benefits or dividends with investing in vacation-rental properties is a new model that can withstand a potential economic downturn, Equity Residences’ managing director Greg Salley tells GlobeSt.com. this concept and why it makes sense for real estate investors
The firm allows buyers to make a low-risk investment in luxury vacation homes in destinations including Lake Tahoe, Hawaii, and Florida and enjoy it with friends and family immediately; the property is managed as an investment first, with the purpose of providing a profit for investors once it’s sold.
The company’s first fund, the Villa Fund, is up 50% overall, with select properties up 100% in value in its first two years of appreciation. The fund has performed so well that nearly half of the properties are being sold with investors opting to convert their investment to EQR’s current offering, the Platinum Fund.
We spoke with Salley about the investment model, how it works for investors and where he sees this concept heading.
GlobeSt.com: Please explain what Equity Residences is and how it works for investors.
Salley: We’re a luxury real estate investment fund, raising $50 million to buy 20 to 25 luxury vacation homes for about $1.5 million to $4 million each—properties that are expected to appreciate and generate good cap rates and returns, but that are good vacation opportunities as well. A minimum investment of $150,000 gives an investor access to our entire portfolio, and they are able to stay at any property within the portfolio rent free. We sell the property after 10 years or so and distribute the profits back to the investors.
GlobeSt.com: Why does this concept make sense for real estate investors?
Salley: They get access to a diversified portfolio in Hawaii, the Caribbean, Europe, Central America, mountain properties in the US, etc. They don’t have to go to the same place every year if they don’t want to; they’re spreading their investment across multiple markets. Our asset manager manages the properties for them, so they get a top-notch experience while their money works for them along the way.
GlobeSt.com: Do you see luxury residential growing as an investment category?
Salley: I think so. It’s interesting how the residential real estate markets change. Large funds like Blackstone bought residential communities during the downturn and rented them out, but now smaller owners can get into the vacation market. A vacation rental property can earn as much in a week as a month of a regular rental, and there’s upside appreciation potential.
There’s almost an unlimited number of options for the types of vacations they can have as part of their investment. There’s also the dividend option: instead of staying at the property, they can take a dividend.
This is different from a timeshare in that we buy actual properties, and the exit strategy is to sell and liquidate for gain. With a timeshare, you have to pay annual dues, and when you go to sell, you’re unlikely to grow your money; it’s more of a forcing mechanism to take vacations. We look at this as an investment first. We’ve remodeled properties, added bedrooms and added square footage to increase the valuation of a property before we sell it. That’s part of the expertise we bring, too: understanding which properties will generate good rental income and cap rates. And you get rent-free vacations or dividends along the way.
GlobeSt.com: What will sustain these investments in the event of another economic downturn?
Salley: What we saw in the last downturn is that the folks who were highly leveraged ended up being the ones who lost their property. These were typically second homes, which people are more likely to walk away from before their primary homes. There may be some short-term debt, but otherwise, we operate without any debt. We can continue to operate our portfolio throughout a downturn. We looked at what vacation rentals were like in the downturn and realized that if it happened, we would be able to operate our properties even in a reduced-revenue scenario.
To find out more about how we choose our residences for investment, head to our blog for the latest examples.
To learn more about how our investors enjoy their vacations, read our investor spotlight blog.
To learn more about Equity Residences investor profile, our partnerships, and advantages of investing in a diversified portfolio of homes, listen to an interview with Real Estate Finance and Investment.